Choosing a business structure is like picking the right tool for a job—each has its strengths, quirks, and costs. For new entrepreneurs, the Limited Liability Company (LLC) and Corporation (Inc.) are two of the most popular options in the U.S. Both protect your personal assets, but they differ in taxes, management, ownership, and paperwork. This guide breaks it all down in plain English and a clear comparison table, so you can choose the structure that fits your business dreams. Let’s get started!
Table of Contents
- What is an LLC?
- What is an Inc. (Corporation)?
- Key Differences at a Glance
- Pros and Cons of LLC vs. Inc.
- Which Should You Choose?
- Need Help Deciding?
What is an LLC?
A Limited Liability Company (LLC) is like bubble-wrap for your personal assets: it shields them from business debts and lawsuits while remaining simple to run. LLC owners, called members, enjoy liability protection with fewer formalities than a corporation. To form an LLC, you file Articles of Organization with your state’s Secretary of State and pay a fee—usually between $50 and $500 (e.g., $50 in Colorado; $500 in Massachusetts). While an Operating Agreement isn’t required in every state, it’s a smart way to spell out ownership, profit splits, and decision-making rules.
Fun Fact: LLCs existed in limited form starting in the late 1970s, but their popularity has exploded since the mid-1990s. In recent years, LLCs have become the most common structure chosen by small-business owners, reflecting their appeal to modern entrepreneurs.
What is an Inc. (Corporation)?
A corporation is a separate legal person with shareholders, a board, and more built-in formality. You file Articles of Incorporation (fees range from $90 in Delaware to $125 in New York), adopt bylaws, and hold annual shareholder and board meetings. Corporations come in two tax flavors:
- C-Corp – default; pays its own 21% federal rate.
- S-Corp – elective; profits flow through to owners’ personal returns (limits apply).
Fun Fact: Although corporations account for roughly 8% of all business tax returns, they generate about 60% of total U.S. business receipts, underscoring how most revenue still flows through corporate entities.
Key Differences at a Glance
Below we compare five critical areas: liability protection, taxation, management, ownership, and compliance.
Comparison Table: LLC vs. Inc.
| Factor | LLC | Inc. (C Corp) | Inc. (S Corp) |
| Liability | Members protected unless they commit fraud/negligence. Courts pierce veil very rarely. | Shareholders protected. Veil-piercing more common than with LLCs. | Same as C Corp. |
| Taxation | Pass-through (Schedule C/K-1); can elect C/S Corp status; Members pay self-employment tax on profits by default. | Double taxation: 21% corporate tax + dividend tax (0%–20%). | Pass-through; no self-employment tax on distributions; strict limits. |
| Management | Flexible: member-managed or manager-managed; no board or meetings required. | Formal: board + officers; annual meetings and minutes mandatory. | Same as C Corp. |
| Ownership | Unlimited members; no stock; transfers need approval. | Unlimited shareholders; stock easy to sell; ideal for VC. | Max 100 U.S. shareholders; one stock class. |
| Compliance | Minimal: annual report (fees $0–$500) and basic bookkeeping. | High: adopt bylaws, hold annual meetings and minutes; several thousand dollars per year. | High: same formalities as C Corp plus S-Corp eligibility upkeep; several thousand dollars per year. |
| Best For | Small businesses, freelancers, hands-on owners. | Scalable startups, VC-funded ventures, public companies. | Small firms wanting pass-through taxation with corporate structure. |
1. Liability Shield
Both LLCs and corporations protect personal assets, but the strength of that shield depends on following the rules.
- LLC: Members are safe from business debts unless they commit fraud, negligence, or mix personal and business funds. Courts rarely “pierce the veil” when formalities are observed.
- Inc.: Shareholders are protected, but corporations face stricter scrutiny; courts may pierce the corporate veil when required formalities (like maintaining minutes, holding meetings, and keeping records) are neglected.
- Take-away: Keep business and personal finances separate, maintain required filings, and document decisions—whatever entity you choose.
2. Taxes
Below is a condensed overview of how each structure is taxed, focusing on key points a newcomer needs to know.
LLC (Default Pass-Through):
- Profits “pass through” to owners’ personal returns—no entity-level tax.
- Single-member LLC: file Schedule C on Form 1040; pay 15.3% self-employment tax on net earnings.
- Multi-member LLC: file Form 1065; each member gets a Schedule K-1 and pays self-employment tax if actively involved.
- QBI Deduction: up to 20% off qualified business income (subject to limits).
LLC Electing S-Corp Status (Optional):
- Owner pays a “reasonable salary” (subject to payroll taxes) and distributes the rest as dividends (no self-employment tax on dividends).
- Must file Form 2553 by March 15, run payroll, file Form 941, and issue W-2s.
C-Corp (Traditional Corporation):
- Pays 21% federal tax at the entity level (plus any state corporate tax).
- Double taxation: dividends to shareholders get taxed again (0%–20% qualified rate).
- Retained earnings avoid immediate dividend tax but may incur an accumulated earnings penalty if held without business purpose.
- Access to R&D credits, Section 179 expensing, and deductible benefits for employees.
S-Corp (Standalone Election):
- Files Form 1120-S; profits flow through to shareholders via K-1—no entity-level tax.
- Owners who work must take a reasonable salary (subject to FICA); remaining profits can be distributed without self-employment tax.
- Eligibility: up to 100 U.S. shareholders, one class of stock, no corporate shareholders.
Taxation Summary Table:
| Structure | Entity Tax Rate | Owner Tax Treatment | Self-Employment Tax on Profits? | Key Notes |
| LLC (Default) | 0% (pass-through) | Owner reports on Schedule C or K-1 → Form 1040 | Yes, 15.3% on net earnings | Single-member uses Schedule C; multi-member files 1065 → K-1. QBI deduction up to 20%. |
| LLC → S-Corp | 0% (pass-through) | Owner takes reasonable salary (W-2); rest is dividends | Only on salary (FICA) | Savings vs. 15.3% if distributions > salary; requires payroll setup. |
| LLC → C-Corp | 21% | Profits taxed at 21% → dividends taxed again (0%–20%) | — | Potential double taxation; can retain earnings; access to corporate credits. |
| C-Corp (Standalone) | 21% | Dividends taxed at 0%–20% on shareholders | — | Traditional corporate structure; double taxation. |
| S-Corp (Standalone) | 0% (pass-through) | Owner salary (W-2) + distributions via K-1 | Only on salary (FICA) | Must meet eligibility (≤ 100 U.S. shareholders, one stock class). |
3. Management Style
- LLCs: Around 80% are member-managed, making them ideal for hands-on owners.
- Inc.: Board oversight—with formal officer roles and annual meetings—is mandatory, which many outside investors expect.”
4. Ownership Flexibility
- LLC: Unlimited members of any nationality; transferring ownership usually requires member approval.
- C Corp: Unlimited shareholders, including foreign investors; stock is easy to sell or transfer.
- S Corp: Up to 100 U.S.-resident shareholders (no foreign or corporate owners) and only one class of stock—best for small teams or family businesses, not for large VC rounds.
5. Compliance & Cost
LLC
- Files a simple annual (or state-dependent biennial) report (fees $0–$500).
- Requires only basic bookkeeping—no mandatory meetings or minutes.
- Total annual cost (state fees plus bookkeeping/accounting) is typically $1,000–$3,000.
C Corp
- Must adopt formal bylaws, hold annual shareholder and board meetings, and keep detailed minutes.
- Files an annual report and may pay state franchise taxes (often a few hundred dollars).
- Legal, accounting, and administrative expenses generally run several thousand dollars per year.
S Corp
- Adheres to the same formalities as a C Corp (bylaws, meetings, minutes).
- Must also maintain S-Corp eligibility (≤100 U.S. shareholders, one class of stock).
- Overall compliance costs are similar to a C Corp’s—several thousand dollars for filings and professional support.
Pros and Cons of LLC vs. Inc.
LLC Pros
- Flexibility: Choose pass-through or corporate taxation; member- or manager-managed.
- Simplicity: Fewer filings and no mandatory meetings; lower compliance costs.
- Cost-Effective: Formation fees average $100–$500; annual costs $0–$500.
LLC Cons
- Limited Funding: Cannot issue stock, making it harder to attract investors (about 5% of venture capital goes to LLCs).
- Self-Employment Taxes: Members pay 15.3% on all profits unless electing C Corp status.
- State Variations: Rules differ across states, complicating multi-state operations.
Inc. Pros
- Funding Access: Issue stock to raise capital; preferred by 95% of venture capitalists.
- Prestige: “Inc.” signals professionalism, boosting credibility.
- Perpetuity: Continues despite owner changes, unlike some LLCs that dissolve.
Inc. Cons
- Double Taxation (C Corp): Higher tax burden (up to 39.8% combined rate).
- Complexity: Requires board, meetings, and extensive records.
- Higher Costs: Formation and compliance costs amount to several thousand dollars annually.
Which Should You Choose?
The choice between an LLC and Inc. depends on your business goals, size, and growth plans:
- Choose an LLC if you’re a small business owner, freelancer, or startup valuing simplicity and flexibility. It’s ideal for businesses with fewer than 10 owners or those not seeking outside investment (e.g., a local coffee shop or freelance designer).
- Choose a C Corp if you plan to scale, seek venture capital, or go public. It suits businesses with complex operations or investor interest (e.g., a tech startup aiming for an IPO).
- Choose an S Corp if you want a corporate framework but still prefer pass-through taxation—and you can meet the eligibility rules (≤100 U.S.-resident shareholders, one class of stock). This works well for a small consulting firm or family-owned business with steady growth prospects.
Need Help Deciding?
At Fynlo, we understand that choosing the right business structure can feel overwhelming. Our accounting software and expert team are here to simplify the process, from formation to tax planning. Whether you’re leaning toward an LLC or a corporation, we can help you navigate the paperwork, optimize your taxes, and stay compliant.
Ready to get started? Schedule a call with Fynlo today to discuss your business goals and find the perfect structure for your success. Let’s build your dream business together!
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